Volume-7; Issue-1; Jan.-June-2017; http://www.ijfar.com/ pp.

01-13; ISSN: 2350-0115

Are Energy Production and Consumption Catalyst for the

Economic Growth of India? A Make in India Perspective
Musavir Ul Habib
Doctoral Research Scholar in Economics
Central University of Punjab, Bathinda, India-151001
P. K. Mishra
Associate Professor in Economics
Central University of Punjab, Bathinda, India-151001
Abstract

Energy is the lifeblood of an economy, may it be developed or developing. It is

considered as a crucial input to the production of nearly all the goods and services of the modern
world. It is central to achieve the interrelated socio-economic and environmental goals of the
sustainable human development. Thus, its production and consumption in an emerging market
economy like India is significant in influencing the long-run growth and development of the country.
The role played by coal and petroleum especially in the transport and manufacturing sectors of India
cannot be underestimated. But the issue lies in the widening gap between the domestic production and
consumption of crude oil in the country which has been contributing to the increasing import bills of
India. Thus, the necessity is to narrow down this gap by increasing domestic production of energy and
by reducing the import of huge barrels of crude oil. The Make in India initiative of the Government
of India has also identified petroleum and gas as key sector along with a total of 25 sectors for
sustained growth of the country. It is through this initiative the government has undertaken a number
of policy reforms to remove obstacles in the ways of making investments and incentivizing the oil and
gas sector in line with the ease of doing business, minimum government and maximum governance
which would ultimately accelerate the pace of economic growth and put the economy on the high
growth trajectory. In this context, this paper examines the link between energy (crude oil) production,
consumption and economic growth in India over 1980-2014 using time series regression, and
concludes that the energy related policies through Make in India initiative of the government shall
act as the catalyst for higher economic growth of the country in the long-run.

Key Words: Energy Production, Energy Consumption, Economic Growth, Make in India.
 Volume-7; Issue-1; Jan.-June-2017; http://www.ijfar.com/ pp. 01-13; ISSN: 2350-0115

1. Introduction

Energy is the lifeblood of the global economy a crucial input to nearly all of the goods and
services of the modern world. Reasonably stable priced energy supplies are central to maintaining and
improving the living standards of billions of people. Energy can be regarded as the oxygen of the
economy - without heat, light and power we cannot build or run the factories and cities that provide
goods, jobs and homes, nor enjoy the amenities that make life more comfortable and enjoyable. Power
is one of the most critical components of infrastructure crucial for the economic growth and welfare
of nations. It is central to achieve the interrelated economic, social, and environmental aims of
sustainable human development. The existence and development of adequate energy infrastructure is
essential for sustained growth of the Indian economy.

The relationship between use of energy and economic growth has been a subject of greater
inquiry as energy is considered to be one of the important driving forces of economic growth in all
economies. The role of energy was completely neglected by the contemporary theories of classical,
neoclassical, monetarists and subsequent endogenous growth theories. These theories signify that
energy has nothing to do with the production function and hence has little relevance with the
economic growth (Lee & Chang, 2008). With regard to the relative consumption of various sources of
energy as percent of the world total, India among the emerging Asian economies, occupies third place
immediately after China and Japan (Kumar & Vimala, 2016). Energy contributes to economic growth
in two ways. First, energy is an important sector of the economy that creates jobs and value by
extracting, transforming and distributing energy goods and services throughout the economy. For
instance, in 2009 the energy industry accounted for about 4% of GDP in the United States. In some
countries that are heavily dependent on energy exports the share is even higher: 30% in Nigeria, 35%
in Venezuela and 57% in Kuwait. Second, energy is an input for nearly all goods and services. In
many countries, the flow of energy is usually taken for granted. But price shocks and supply
interruptions can shake whole economies. For countries that face chronic electricity shortages like
India, continuing energy disruptions affect the economies significantly.

Policy-makers both at national and state levels are increasing their efforts to make sure that
energy acts as a spur, rather than a hindrance, to Indias economic growth (India Energy Outlook,
2015). Though coal and petroleum are by far the most important fuel in the Indian economy, but
Indias pledge is to follow the cleaner path of energy consumption to reach their economic
development as against the other countries which are developed today as enunciated in their Climate
Summit in Paris has underlined the countrys commitment to a growing role for low-carbon sources of
energy, led by solar and wind power and generally carbon less sources of energy. Infrastructure debt
funds and other tools specifically aimed at attracting finance for low-carbon projects and high
efficiency technologies, loans for a longer tenure, and attempts to carve out renewable energy as a
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separate and priority sector are some of the key measures that will help India spur up its energy
production and generation capacity. Thus, it can be found that India has established goals rapidly to
expand its use of both renewable, non-renewable energy and more efficient technologies. So, the
major responsibilities rest on the shoulders of the countrys energy policy-makers; but they have
major opportunities to chart a way forward for the energy sector that is distinctive: more secure, more
sustainable, more innovative. However, the path ahead is not straightforward. International
partnerships will be required to deliver the reliable, sustainable, affordable energy system that India
wants and needs.

On September 25, 2014, India's Prime Minister, Shri Narendra Modi, launched the 'Make in India'
campaign to convey the message to the world that things are changing in India - doing business is
going to get easier, efficient and transparent. Consequently, 'Make in India' is a programme for
making India's environment conducive to business so that economic growth gets the boost. The
Government aims to eliminate unnecessary laws and regulations and shorten bureaucratic processes,
upgrade physical infrastructure to support growth, open up more sectors to foreign direct investment
(FDI), and most importantly, be seen as a true business partner instead of a mere 'permit-issuing
authority'. Manufacturing accounts for only 15% of India's GDP, which is dismal compared to other
developing South East Asian nations. The Indian Government wants to raise that share of
manufacturing sector towards GDP to 25% by 2022 and is committed to transforming India into a
global manufacturing destination, while ensuring that goods are manufactured with 'zero defect' and
with 'zero effect' on the environment. The Government has identified 25 sectors under Make in India
policy that India could become a world leader in and listed growth drivers, investment opportunities,
the FDI policy, sectoral policies and specific reasons to invest in each sector. These sectors include
automobiles, aviation, biotechnology, chemicals, construction, defence manufacturing, electronics,
information technology and Business Process Management, pharmaceuticals, renewable energy,
textiles, ports, tourism and hospitality, wellness, etc. These sectors are set to become the essential
drivers of economic growth in the near future years.

There are various factors which make oil and gas sector as an important one in Indian economy
and Make in India initiative. Oil and gas industry ranks amongst India's eight core industries. India is
the third largest consumer of oil in the world in 2015, after the United States & China. Furthermore,
oil imports constitute about 81% of India's total domestic oil consumption in 2015-16. Again, as over
one third of energy requirement is met by hydrocarbons, thus, the role of oil and gas sector in an
economy cant be neglected at all. Economic growth, increasing prosperity, a growing rate of
urbanization and rising per capita energy consumption has led to increased demand for energy in the
country. India is the fourth largest importer of oil and the 15th largest importer of petroleum products
and Liquefied Natural Gas (LNG) globally. The increased use of countrys natural oil resources and

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indigenous renewable resources is expected to reduce Indias dependence on expensive imported

fossil fuels. Thus, oil and gas is one of the key sectors identified under Make in India programme
which is set to one of the important growth drivers of the Indian economy in the near future. As of
now non-renewable energy contributes 85.3% of the total installed capacity in the country. The
government of India by adopting Make in India policy, undertook number of policy reforms to
remove obstacles to investment and incentivize oil and gas sector on the lines of ease of doing
business, minimum government and maximum governance and ultimately to propel the economic
growth further upwards. Furthermore, Indias has planned a renewable energy target of installing 175
giga watts (GW) capacity by 2022.

While all eyes have been on China and its incredible economic growth in recent years, India has
been quietly catching up. India, home to nearly 18% of the worlds population, uses only 6% of the
worlds primary energy. Indias energy consumption has almost doubled since 2000 and the potential
for further rapid growth is enormous. In a growing economy, where there is so much of emphasis on
manufacturing, naturally the demand for energy will grow. India is set to become the worlds most
populous country in the next few years. Indias total energy demand is estimated to more than double
in next few years, propelled higher by an economy that is expected to be five times larger in 2040 and
a demographic expansion that makes India the worlds most populous country. Thus, India is about to
contribute more than any other country to the planned rise in global energy demand, around one-
quarter of the total; even so, energy demand per capita in 2040 is still estimated to be 40% below the
world average. Per capita electricity consumption in the country is less than that of Africas and one-
tenth of Americas levels. In fact, even though India is the third largest market in terms of gross
electricity generation, it still has almost 250 million people without access to power. The Government
of India has adopted several policies to fulfil the increasing demand. The government has allowed 100
per cent Foreign Direct Investment (FDI) in many segments of the sector, including natural gas,
petroleum products, and refineries, among others. Today, it attracts both domestic and foreign
investment. Rectifying this situation will be critical to ensure Indias economy grows five-fold by
2040 and that policies such as Make in India, Skilling India and Digital India are a success.

Energy and electricity growth will, therefore, become crucial for powering the countrys future.
Indias economy, already the worlds third-largest, is growing rapidly and policies are in place to press
ahead with the countrys modernization and an expansion of its manufacturing. If a well-managed
expansion of energy supply can be achieved, the prize in terms of improved welfare and quality of life
for Indias 1.3 billion people is huge first and foremost for the estimated 240 million that remain
today without access to electricity. Indias government is aware of the magnitude of this challenge,
and in 2014 announced a huge focus on transforming the energy sector by undertaking many reforms.
Only a couple of years after this announcement, there is already evidence to suggest progress is being

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made: domestic coal production is up, the countrys oil production has increased, theres been a big
push for energy efficiency, infrastructure has grown and hence the growth rate has picked. There has
been a remarkable shift in domestic as well as foreign investor sentiment. FDI equity inflows were up
52% at USD 10.7 billion during AprilJuly 2014. Investments (equity and debt) by Foreign Portfolio
Investors/Foreign Institutional Investors rose to USD 20.5 billion in the first five months of FY 2014-
15 compared to USD 8.6 billion in the whole of FY 2013-14.

Indias power sector is one of the most diversified in the world. Sources of power generation
range from conventional sources such as coal, lignite, natural gas, oil, hydro and even nuclear power
to viable non-conventional sources such as wind, solar, and agricultural and domestic waste. Indian
power sector is undergoing a significant change that has redefined the industry outlook. Sustained
economic growth continues to drive electricity demand in India. At the same time, the demand for
energy has been also driven high by the launching of the policy of Make in India for increasing the
production and productivity in various key sectors of economy. Furthermore, the Government of
Indias focus on attaining Power for all has accelerated capacity addition in the country. As India is
growing very fast, energy is the central focus of attention to achieve Indias development ambition to
support an expanding economy, to bring electricity to those who remain without it, to develop the
necessary infrastructure to meet the needs of what is soon expected to be the worlds most populous
and fastest growing economy. Thus, whatever happens in India has significantly influence the global
economy. In this perspective, India is a significant player for an in depth study.

2. Literature Review

In the literature, energy has occupied a significant place in influencing the sustainable economic
growth and development of an economy. Thus, several studies have been conducted by researchers
across time and space to explore the direction of the causal relationship between energy and economic
growth. The empirical literature on this issue primary centred around four possible hypotheses
energy driven growth hypothesis, growth-led energy hypothesis, feedback hypothesis and neutrality
hypothesis. This section of the paper presents the review of the empirical literature concerning the
relationship between the oil production & consumption and economic growth.

Glasure & Lee (1997) examined the causal relationship between oil consumption and GDP for
South Korea and Singapore and found the evidence of the bidirectional causality (feedback
hypothesis) between oil consumption and GDP for them. Lee (2005) investigated the causal
relationship between the oil consumption and GDP for 18 developing countries and found the
evidence in favour of energy driven growth hypothesis both in long-run and short-run. Mehrara
(2007) examined the causal relationship between per capita oil consumption and per capita GDP for
the panel of 11 oil exporting countries and found the evidence in favour of growth-led energy
hypothesis both in long-run and short-run. Chontanawat et al. (2008) investigated the causality
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between the per capita crude oil consumption and per capita GDP for 108 countries and found the
evidence in favour of energy driven growth hypothesis. Lee & Chang (2008) explored the causality
between the oil consumption and real GDP for 16 Asian countries, and found the evidence in favour
of energy driven growth hypothesis in the long-run. Imran & Siddiqui (2010) for three SAARC
countries found the presence of long-run causality between oil consumption and economic growth.
Ozturk et al. (2010) estimated the relationship between crude oil consumption and GDP for the 51
countries and the results reveal the presence of long-run causality from GDP to oil consumption for
low-income countries, and from oil consumption to GDP for the lower-middle and upper-middle
income countries of the sample. Pradhan (2010) explored the nexus between oil consumption and
economic growth in the five SAARC economies, and the results provide the evidence of
unidirectional causality from economic growth to per capita oil consumption for India and Sri Lanka,
bidirectional causality between oil consumption and economic growth for Pakistan, unidirectional
causality from per capita oil consumption to economic growth for Bangladesh and Nepal. Apergis &
Danuletiu (2012) examined the relationship between per capita oil consumption and per capita GDP
for Romania and found the presence of bidirectional causality between the energy consumption and
economic growth both in the long-run and short-run. Rezitis & Ahammad (2015) investigated the
relationship between oil consumption and economic growth for 9 South and South Asian countries,
and the results reveal the evidence in favour of energy-driven growth hypothesis for Bangladesh,
Brunei, Darussalam, India, and Thailand; growth-led energy hypothesis for Sri Lanka; feedback
hypothesis for Malaysia and the Philippines; and neutrality hypothesis for Indonesia and Pakistan.
Vafaeirad et al. (2015) examined the relationship between oil consumption, economic growth and
gross capital formation for the selected Asian countries and the results found the evidence of short-run
causal relationship from energy to GDP and no long-run causality is detected.

It inferred from the review of relevant extant literature that the relationship between energy
consumption and economic growth is still a moot point. It is also learned that the studies examining
the relationship between oil production and economic growth is non-existent. Therefore, the re-
examination of the relationship between energy production, consumption and economic growth can
substantially contribute to the literature. It is with this backdrop, this paper attempts to re-investigate
the issue in the context of India. The rest of the paper is organized as follows: Section 3 makes a note
of the data and methodology used in the study; Section 4 presents the trends in the oil production,
consumption and economic growth in India; Section 5 explores the empirical relationship between
them; and Section 6 concludes.

3. Data and Methodology

The primary objective of this study is to investigate whether energy (oil energy) production and
consumption can be catalysts for the economic growth of India. Particular, it attempts to examine the
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dynamics of the relationship between oil production & consumption and economic growth in the
context of Indian economy. The sample period spans from 1980 to 2014 chosen as per the availability
of data. The study uses annual data on crude oil production and consumption collected from United
States Energy Information Agency (US EIA, 2017). Thus, the variables of energy production and
consumption are petroleum production and consumption in 1000 barrels per day respectively.
Similarly, the variable representing economic growth of India is GDP per capita (constant 2010 US $)
and annual data on it has been collected from the World Development Indicators database of the
World Bank. First of all the Compound Annual Growth Rate (CAGR) is calculated to estimate the
growth rate of crude oil production and consumption in India over the sample period. Also the time
series plots have been created to observe the trend patterns of oil production & consumption and
economic growth in India. At last the Vector Error Correction Model (VECM) has been estimated to
examine whether oil production and consumption are catalysts for the economic growth of India. This
estimation has been performed in three steps stationarity test of all the variables under
consideration, cointegration test to see the long-run equilibrium relationship between variables, and
VECM estimation to explore the causal relationship between variables.

4. Trends in Oil Production and Consumption in India

The production of crude oil in India increased from 186 thousand barrels per day in 1980 to 1,022
thousand barrels per day in 2014. The consumption of crude oil increased from 643 thousand barrels
per day in 1980 to 3735 thousand barrels per day in 2014. The Table-1 shows the CAGR of oil
production and consumption in India.

Table 1: CAGR of Crude Oil Production and Consumption in India

Period Oil Production Oil Consumption

1980-86 20.865 6.196
1987-93 -1.902 4.743
1994-00 1.858 6.344
2001-07 1.683 3.909
2008-14 2.941 4.162
1980-2014 2.850 5.402
Source: Authors Own Estimation from US-EIA Data

The CAGR of crude oil production varies between 20.865 and -1.902 percent. The CAGR of oil
production shows 20.865 percent increase during the period 1980-86 may be due to offshore
discoveries of oil reserves in India. The production of oil from Bombay High (now Mumbai High)
was responsible for rapid growth of countrys total production (Finger & Kunneke, 2011). In 1986,
domestic crude oil production was able to meet the 2/3rd of the domestic crude oil requirement.

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However, during 1987-93, the CAGR of crude oil production decreased by -1.902 may be due to fall
in crude oil prices and glut in the production of crude oil in Middle East countries. Since 1994, the
CAGR of crude oil production in India has grown at a snails pace with the growth rate of around 1-2
per cent per year. Throughout the sample period 1980 to 2014, the CAGR of oil production has been
at 4.162 per cent. On the other hand, the CAGR of crude oil consumption varies between 3.909 and
6.344 percent. The CAGR during 1987-93 declined to 4.743 from 6.196 during 1980-86 which may
be due to oil price shock of 1990s because of Iraqi invasion of Kuwait in August 1990. The CAGR of
oil consumption again showed an increasing trend during the period 1994-2000 when it reached 6.344
percent, but again decreased to 3.909 percent during 2001-07. The fall in CAGR during 2001-07 may
be attributed to oil price shock of 2000s which was caused by numerous factors such as tension in
Middle East, falling value of US dollar and soaring energy demand from China. Further, the CAGR of
oil consumption showed an upward trend during 2008-14 may be due to the economic recovery of
Indian economy from global financial recession.

The Fig.1 plots the oil production and consumption measured in 1000 barrels per day in India for
the period 1980 to 2014, and compares it with the trend pattern of the GDP per capita (constant 2010
USD).

Fig.1: Oil Production, Oil Consumption, and GDP Per Capita in India

Source: Authors Own Plot

It is revealed that the production and consumption of crude oil in India have been on rise in India.
But the oil consumption curve is not only steeper but also lies much above the oil consumption curve.
It clearly indicates that the consumption of crude oil in India has been increasing at a rapid pace. And,
the gap between the two is widening over time. This has resulted in large oil imports by the country.

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When we compare oil production and consumption with GDP per capita, it is clear that the oil
demand as well as supply is increasing along with the increase in GDP per capita.

5. Energy and Economic Growth

The objective of this section is to see whether energy production and consumption are catalysts to
economic growth of India. For this purpose, we have measured energy in terms of production and
consumption of crude oil and economic growth in terms of GDP per capita. Thus, the variables of the
study are Energy Production (EP), Energy Consumption (EC) and Economic Growth (EG). All these
time series variables are taken in their natural logarithms to avoid the problems of heteroskedasticity.
At the outset, we tested the stationarity of the time series under consideration using Augmented
Dickey-Fuller (ADF) unit root test. The results are presented in Table-2.

Table 2: Results of ADF Unit Root Test

ADF statistic at level ADF statistic at
p-
Variables with trend and 1stdifference with trend p-value Decision
value
intercept and intercept
Ln(EG) -0.729746 0.9624 -5.599448 0.0003* I(1)
Ln(EP) -3.057473 0.1355 -3.324805 0.0844*** I(1)
Ln(EC) -1.346337 0.8585 -6.470675 0.0000* I(1)
Source: Authors Own Estimation *, *** Significant at 1% and 10% levels respectively

It is seen that the null hypothesis of non-stationarity could be rejected at the level but rejected at
the first differences for all the variables. Thus, the variables of the study are all integrated of order
one. Granger (1981) proved that if a set of variables are stationary in their first differences, then a
linear combination of them may be stationary at the level, and in this case these variables are called
cointegrated or having long-run equilibrium relationship between them. We have employed
Johansens cointegration test for this purpose and the results are reported in Table-3.

Table 3: Results of Johansens Cointegration test

Hypothesized No. of Critical value Maximum Critical value

Eigen Trace
cointegration at 5 % (p- Eigen at 5 % (p-
Value Statistic
equation(s) value) Statistic value)
42.91525 25.82321
None* 0.558347 50.02037 26.96860
(0.0084) (0.0352)
25.87211 19.38704
At most 1 0.347246 23.05176 14.07633
(0.1079) (0.2491)

12.51798 12.51798
At most 2 0.238133 8.975434 8.975434
(0.1819) (0.1819)
Source: Authors Own Estimation

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The results indicate that the null hypothesis of r = 0 or, no cointegration is rejected at 5 per cent
critical value both by Trace and Maximum Eigenvalue tests. So, the variables are cointegrated with a
maximum of one cointegrating vector. In other words, there exists a long-run equilibrium relationship
between energy production, consumption and economic growth in India. The implication is that both
energy production and energy consumption are significant for the economic growth of the economy.
This finding for India is in line with the findings of Glasure & Lee (1997) for South Korea and
Singapore, Lee (2005) for 18 developing countries, Imran & Siddiqui (2010) for India, Pakistan and
Bangladesh, and Apergis & Danuletiu (2012) for Romania. This finding provides the empirical
support to the emphasis on oil production and consumption that the Govt. of India has assigned
through its Make in India initiative.

Table 4: Results of VECM Regression Estimation

Independent Variables Ln(EG) Ln(EP) Ln(EC)

ECTt-1 -0.178715** 0.533505 -0.085992

[t-statistic] [-2.299138] [2.353197] [-0.757324]
(p-value) (0.0240) (0.0209) (0.4510)
Ln (EGt-1) 0.230165 0.325409 -0.150643
[t-statistic] [1.377555] [0.667751] [-0.617213]
(p-value) (0.1720) (0.5061) (0.5388)
Ln(EPt-1) 0.100263 0.043319 0.018286
[t-statistic] [1.586589] [0.235029] [0.198092]
(p-value) (0.1164) (0.8148) (0.8435)
Ln(ECt-1) -0.242506 -0.347093 0.041556
[t-statistic] [-1.652602] [-0.810974] [0.193864]
(p-value) (0.1021) (0.4197) (0.8468)
C 0.1021* 0.036853 0.052646*
[t-statistic] [4.404768] [1.380671] [3.938079]
(p-value) (0.0000) (0.1710) (0.0002)
Source: Authors Own Estimation
At the end, we estimated the VECM for examining the dynamic linkages between energy
production, consumption and economic growth in India over the sample period (Engle & Granger,
1987). This estimation provides the causality relationship both for the short- and the long-run. The
results are reported in Table-4. It is clear that the coefficient of the error correction term, ECTt-1 in

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Economic Growth Equation is negative and also significant at 5% level. This indicates the presence of
long-run causal relationship running from energy production and consumption to economic growth of
India. The magnitude of the error correct terms indicates the rate at which deviations from the long-
run equilibrium is corrected per period. In our case such adjustment rate is 0.178 percent per year.
However, our VECM estimation does not reveal any short-run relationship among the variables as the
coefficients of the lagged endogenous variables are not significant. Thus, our results of VECM
estimation lend to support the energy-driven growth hypothesis for India. This finding corroborates to
the findings of Lee (2005) for 18 developing countries including India, Lee & Chang (2008) for 16
Asian countries including India, Imran & Siddiqui (2010), for three SAARC countries, Apergis &
Danuletiu (2012) for Romania. The finding is not in line with the findings of Asafu-Adjaye (2000)
and Mehrara (2007) which advocates for the existence of short-run causality between energy and
economic growth.

Interpreting from the point of view of the inclusion of energy sector in Make in India initiative,
we may argue that energy production and consumption would certainly be catalysts for long-run
higher economic growth of India as rightly envisaged by the policy makers. Further the emphasis on
oil form of energy in Make in India is justified on the ground that crude oil is the predominant form of
energy in India after coal, and also oil imports constitute about 81% of India's total domestic oil
consumption in 2015-16. This has substantially increased import bills of the country and has brought
heavy burden on foreign exchange reserves. However, the recent years relaxation of the FDI norms
for oil and gas sector and permission of 100 percent FDI in the automatic route would certainly
contribute to energy efficiency and economic growth.

6. Conclusion

In the perspective of Make in India initiative, this paper explores whether energy production and
consumption can be catalysts for achieving higher rate of economic growth in the country. In line with
the emphasis on oil and gas sector in the Make in India initiative, we measured energy production and
consumption in terms of crude oil production and consumption (1000 barrels per day) and estimated
the VECM regression for possible relationships. The results validate the energy-driven growth
hypothesis in the context of Indian economy. In other words, energy can be treated as a prerequisite
for sustained economic growth and development in the long-run. Energy is essential for economic
growth, particularly for improving the quality of life and for increasing the opportunities for
development. The widening gap between oil production and consumption in the country needs special
attention. In this direction, the Make in India initiative for increasing domestic oil production and
reducing oil imports by the country would certainly add to higher economic growth in the long-run.

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